Income Statements » What’s Behind the Numbers » Exercises
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E X E R C I S E S
is.wbn.bse.050 Connecting what you see to events behind income statements (Starbucks)
Answer these questions using the excerpt on the next page from Starbucks’ 2002 Annual
Report disclosing some of the company’s accounting policies. No solution is provided.
(a) First, assume Starbucks recognizes revenues at the point-of-sale when they sell $10
of coffee. Ignoring the cost of the coffee, how is the revenue from the sale reflected
in the balance-sheet equation? Do net assets increase? If so, why?
(b) Suppose coffee beans cost Starbucks $2 to purchase, $1 to roast, and $0.50 to brew.
How is net assets affected when Starbucks purchases coffee beans? How is net assets
affected when the coffee beans are roasted? How are net assets affected when the
processed coffee beans are brewed and sold? Which principle supports recognizing
inventoried costs when coffee is sold and revenues are recognized?
(c) Why report $10 of revenue and $3.50 of expenses rather than simply $6.50 of net
income?
(d) Now, suppose that the gross margin decreases from $6.5 to $6. Why do we care
whether this decrease is due to a decrease in revenues, an increase in expenses, or
some combination of changes to revenues and expenses?
(e) Next, assume a customer pays $10 for a Starbucks value card up front and then uses
the card over time until the balance is depleted to zero. In this case, the value card
is swiped through a machine each time coffee or another Starbucks product is sold,
rather than collecting cash from the customer. Should Starbucks recognize revenue
when the value card is sold? If not, why not? Which revenue recognition criteria are
satisfied and which, if any, have not been satisfied? When should the revenue be recognized?
(f) What risky events or circumstances could occur between the time Starbucks sells
a value card and the customer uses it that could prevent Starbucks from earning
related income?
(g) What are the revenue-recognition policies associated with value cards?
(h) Assume Starbucks incurs $15 of cost to advertise in a paper this year. When will
Starbucks recognize related advertising expense?
(i) Now assume that Starbucks incurs $25 of cost this year to produce an advertisement
that will run for the first time next year. The advertisement will likely benefit sales
for a few years. When will Starbucks recognize the related advertising expense?
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Record Keeping
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you learn how to
do record keeping
and reporting.
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On April 27, 2001, the Co
split of its $0.001 par va
2 2001
record on March 30,
data in these consolidate
restated to give effect to th
carrying value of the assets to projected future cash flows in
addition to other quantitative and qualitative analyses. Upon
EXERCISE
indication that the carrying value of such assets may not be
recoverable, the Company recognizes an impairment loss by a
Figure:
Starbucks’
Excerpt
from Accounting
Policies
Footnote plant and
charge
against
current
operations.
Property,
This figure illustrates Starbucks’ accounting policies footnote.
equipment assets are grouped at the lowest level for which there
are identifiable cash flows when assessing impairment. Cash
flows for retail assets are identified at the individual store level.
Earnings Per Share
The computation of bas
the weighted average n
stock units outstanding d
tion of diluted earnings p
of common stock equiv
subject to stock options.
Revenue Recognition
In most instances, retail store revenues are recognized when
payment is tendered at the point of sale. Revenues from stored
value cards are recognized upon redemption. Until the
redemption of stored value cards, outstanding customer balances
on such cards are included in “Deferred revenue” on the
accompanying consolidated balance sheets. Specialty revenues,
consisting mainly of product sales, are generally recognized
upon receipt by customers. Initial non-refundable fees required
under licensing agreements are earned upon substantial
performance of services. Royalty revenues based upon a
percentage of sales and other continuing fees are recognized
when earned. All revenues are recognized net of any discounts.
Recent Accounting Pronounc
In August 2001, the Fina
(“FASB”) issued SFAS
Impairment or Disposa
supercedes SFAS No. 121,
Long-Lived Assets and for
Of.” SFAS No. 144 retains
No. 121, but sets forth new
broadens the scope of qual
Company’s adoption of SF
will not have a material im
financial position and resu
Advertising
The Company expenses costs of advertising the first time the
advertising campaign takes place, except for direct-toconsumer advertising, which is capitalized and amortized over
its expected period of future benefit, generally six to twelve
months. Net capitalized direct-to-consumer advertising costs
were $0.8 million and $0.9 million as of September 29, 2002,
and September 30, 2001, respectively, and are included in
“Prepaid expenses and other current assets” on the
accompanying consolidated balance sheets. Total advertising
expenses, recorded in “Store operating expenses” and “Other
operating expenses,” on the accompanying consolidated
statements of earnings were $25.6 million, $28.8 million and
$32.6 million in 2002, 2001 and 2000, respectively.
In November 2001, FASB
(“EITF”) No. 01-14, “Inc
Reimbursements Receiv
Incurred.” This Issue clarif
reimbursements received f
conjunction with providin
central ongoing operations
the income statement.The
on December 31, 2001, and
the Company’s consolidate
Store Preopening Expenses
Costs incurred in connection with the start-up
and promotion
Starbucks’
2002 Annual Report
The company’s
notes
found
in its annual report
are an integral part of its statements.
of new store
openings
are
expensed
as incurred.
Rent Expense
Certain of the Company’s lease agreements provide for
scheduled rent increases during the lease terms or for rental
28
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In November 2002, the F
“Guarantor’s Accounting
Guarantees, Including Ind
Others,” which elaborate
guarantees, and clarifies w
initial liability for the fair v
guarantee agreements.The